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DAOs: Empowering the Community to Build Trust in the Digital Age

Hexlant explores the current state and future of decentralized autonomous organizations.

Published onFeb 10, 2022
DAOs: Empowering the Community to Build Trust in the Digital Age
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I. Introduction


Decentralized Autonomous Organizations (“DAO”s) have garnered attention again with the growth of the Decentralized Finance (“DeFi”) and Non-Fungible Tokens (“NFT”s) market. While DeFi is novel finance and NFTs are the future of the art and gaming, DAOs are called the future of human organization and community.

The DAO refers to an organizational form in which members coordinate their efforts and digital resources based on multilaterally agreed smart contracts. In other words, it is a new organizational structure that can render the entire governance process efficient and reliable through blockchains, from decision-making to operation of systems themselves. In South Korea, the DAO is widely known as a protocol economy model that can fairly distribute among contributors the value and benefits created via the platform.

Generally, the operation period of DAO services can be as short as one year. Nevertheless, the number of DAO players has been increasing rapidly due to the activation of tool services that can build DAOs more easily. The applicable industries are broad and span art, developer support, finance, insurance, education, media, etc.

In addition, the legal validity and governance framework of DAOs have been actively debated in the context of leading actual social change. Several attempts are still underway to resolve insufficient governance incentives such as legal ambiguity of smart contracts, low turnout of global community members, and limitations in attracting funds.


II. DAOs


  1. Characteristics of DAOs


The DAO is a decentralized autonomous organization based in the Internet. It conducts supervision through a series of automated rules via self-regulation proposals without the intervention of a centralized entity.


Fig. 1: Differences between DAOs and Traditional Organizations


Traditional Organization

DAO

Permission

Granted by the State

Permissionless

Assets

Custodied by Banks

Crypto

Property Rights

Enforced by Police

Tracked on Blockchain

Ownership & Governance

Intermediated by Lawyers

Managed through Software

Disputes

Settled by Courts

Arbitration network)

Sources: dOrg, Stanford University, Hexlant Research


Benefits of DAOs

1) Borderless collaboration

2) Organizational transparency

3) Participatory decision-making

4) User ownership

5) Algorithmic ownership allocation

6) Novel fundraising mechanisms

7) Trustless fund management


2. Structure of DAOs


Taxonomy Classification

The DAO’s taxonomy is classified via four key elements: multilateral agreements, resource management, and the discussion and voting processes.

The multilateral agreement is the decision-making process for DAOs to coordinate P2P-based influence instead of the distribution of certain classes. However, in cases where a multilateral agreement is required, natural language texts that explain certain emergency software upgrades or legal contracts may be excluded.

Resource management is one of the main elements since a DAO’s autonomy is closely related to control over allocating and managing resources. The monopoly of on-chain resources (e.g., tokens) can break the balance in the DAO’s multilateral consensus, so smart contracts must be properly implemented. When using off-chain resources like legal tender, individuals and companies have control over the assets, so they must abide by the law.


Aave DAO Governance - Proposal to add Fireblocks LLC as a whitelister

Due to the nature of the DeFi system, it was unknown to whom the lender was lending but through the whitelist registration, Aave Governance ensures that users of these approved lending pools comply with relevant laws depending on the jurisdiction of the user.

Aragon Budget DAO

The Aragon Budget DAO provides visibility into a DAO’s token allocation, voting, financial execution, and additional payments. It also secures transparency of funds so stakeholders can track down a bill of expenditures. In addition, the semi-annual transparency report1 provides further information on legal currency and other platform expenditures that cannot be confirmed through Budget DAO. (Transparency Report, p. 33)


Discussion and voting lead to resolutions for how the majority can achieve the other key elements above. The smart contract execution implements these official processes transparently. Forums and messenger discussions held arbitrarily off-chain are also possible. In this case, when a rough agreement is reached in the proposal discussion, on-chain consensus can be achieved by switching to chain-based voting.


Synthetix GrantDAO

After submitting a grant proposal by referring to GitHub, the DAO will review the proposal. At this time, if DAO members believe that the proposal needs to be reviewed, they will submit it to the Grants page and discuss the feasibility of the proposal with community members, without the need to vote for two days. After the grace period, the DAO will vote on approval of the proposal.


Each DAO has a dedicated voting method based on a transferable floating stake. This staking token can be a basic token or an external token. Additionally, weights may be applied to tokens that have not yet been transferred due to other categories (such as reputation rather than equity). If voting is conducted based on the account address, each person can exercise n votes, so sustainable guidelines such as Know Your Customer (KYC) rules need to be considered.


Operation Method

The goal of the DAO is to encourage people to achieve shared common missions while navigating through their governance. To form a DAO, four decisions need to be made. 1) Allocation of resources and funds 2) Issuing new shares 3) Providing services 4) Managing external systems.


Fig. 2: DAO Mechanism

Share Distribution

  1. Bonding Curve2/IDOs3

  2. Liquidity Mining

  3. Airdrop (Uni, 1inch)

Decision-making

  1. Reputation/ Token-weighted Voting

  2. Quadratic Voting4

  3. Predictive Markets

Value Capture

  1. Rev-share (revenue split between token holders and treasury)

  2. Claim on the Treasury (Ragequit)

Sources: dOrg, Stanford University, Hexlant Research


History of DAO

The DAO

In 2016, The DAO, a platform for investor-centered venture capital, caused an Ethereum hard fork as it lost $60 million of ether by a smart contract reentrancy attack only two months after it had been launched. Despite its short lifespan, it has inspired DaaS, a system to promote DAO distribution as in Aragon, DAOStack, Colony, various MolocDAOs, and MetaCartel.

ICO Boom

After the failure of The DAO, players raised funds with initial coin offerings representing DAOs in 2017. Most of them failed before establishing decentralized governance.

DAO Frameworks

In 2018, DAO frameworks like Aragon, DAOStack, and Colony appeared. Those DAO frameworks focused on designing permission to securely connect a wide range of modules through voting, building transaction delivery systems, and figuring out problems of distributed decision-making processes.

The Appearance of Early Market Suitable Products

Finally, successfully running services on the market emerged in 2019. There are non-profit DAOs like Moloch, a web3 development collective dOrg, DeFi insurance protocol Nexus Mutual, etc. Some of them tried some projects to attain legal status.

The DeFi Explosion

In 2020, popularized liquidity mining and governance tokens appeared. Compound, Uniswap, MakerDAO, Synthetix, Aave, Yearn, Sushiswap, and Badger are DeFi DAOs.

NFT Boom

NFTs, known for their nonfungible scarcity, have been subject to an investment limitation as it is difficult to assess an NFT’s value objectively due to the lack of evaluation indexes. As a result, the Venture DAO model, which enables joint investment, has been drawing keen attention alongside the growth of the NFT market. Members of the DAO conduct deal sourcing and screening processes conducted by existing capitalists based on the smart contract. It is a form of decision-making with the power of collective intelligence, joint investment, and distribution of profits. As the number of such NFT DAOs increases, it is expected that standards for the proper evaluation of NFTs will be established.


Example of a DAO’s Architecture

The architecture of a DAO can be described as consisting of the underlying protocol layer, service and middleware, and decentralized application layer. Let us look at the basic technology stack required for a DAO through DAOStack architecture.

The underlying protocol layer can choose between on-chain governance or off-chain governance. On-chain governance refers to the form in which governance is performed within the chain without any elements other than blockchain network components, as seen with Decred, Tezos, and Polkadot. This method includes developers, users, and miners voting on blockchains to modify policies. Off-chain governance is an informal discussion model that convenes outside of the network but still affects internal networks, as seen with Bitcoin Improvement Proposal (BIPs) and Ethereum Improvement Proposals (EIPs).

DAOStack utilizes the Arc library and infra library based on the Ethereum mainnet. These two libraries include universal contract functionality such as DAO smart contract address and assets, DAO tokens, the DAO’s authority (assigning reputation to members, upgrading DAO contracts, adding new functions or deleting them, etc.), restriction of authority (limiting fund use per proposal and maximum reputation scores of users), DAO access constraint and more. Although there is an element of managing the voting machines that perform voting and the distribution of voting rights, DAOStack uses reputation-based voting rights.

Middleware & services can be divided by service aggregation (ex. Snapshot) and tools that help to create the DAO (Aragon, DAOStack, subDAO). Snapshot is a tool for making proposals off-chain and providing flexibility in voting and calculation methods. It also allows the proposals and voting of several DAO services to proceed in one place. Among DAO tools, the DAOStack protocol helps to easily build distributed governance for submitting proposals, granting votes, sharing proposal, executing results and managing user reputation. Aragon distributes DAOs and provides governance establishment, verifiable centralized voting, dispute resolution, and decentralized voting solutions as independent services.


Fig. 3: Aragon DAO OpenStack


Client

Govern

Voice

Court

Vocdoni

Characteristic

Distribution

platform

Governance

Voting

solution

Distributed dispute resolution

protocol

Voting

protocol

Feature


Administration of DAO

Legislative of DAO

Judiciary

of DAO


Composition

Template

Coordinate schedule

  • Weighted voting

  • Quadratic voting

  • Range voting

  • Multi- choice voting

  • ERC-721 Voting


Anonymous voting with zero-knowledge proofs

Source: Aragon

* Govern, Voice, Court are interoperated


The decentralized application layer is divided into financing and business decision-making types according to the use of governance tokens. Two of the most representative financing DAOs are The DAO and Moloch DAO. There is also MakerDAO, wherein people participate in business decision-making.

DAOStack distributes new DAOs through Alchemy and provides votes and suggestions by exploring existing DAOs.


Fig. 4: Composition of DAO through DAOStack Architecture

Sources: Hexlant Research, Nodesblock, DAOstack

Fig. 5: Comparison of Ethereum DAO Projects


Moloch V2

Moloch V2 + Minion

Moloch V3

Aragon

Colony

GitHub Link

Available

Available

Available

Available

Available

Audited

O

O

X

X

O

VentureDAO projects using the library

MetaCartel Ventures,

The LAO,

Flamingo DAO

The LAO

-

Stacker Ventures

Angel DAO

-

Support multiple tokens for contribution

ETH, ERC20

ETH, ERC20

ETH, ERC20

ETH, ERC 20

ETH, ERC 20

Token Whitelist

Exist

Exist

Exist

Exist

Exist

Function to cancel the suggestion and refund in case of emergency

O

O

O

-

-

Submit a proposal

Anyone

Anyone

Anyone

Anyone

Anyone

Voting

Members only

Members only

Members only

Members only

Members only

User dashboard

Provided

Provided

Provided

Provided

Provided

Guildkick

Available

Available

Available

-

-

Ragequit

Available

Available

Available

-

-

Loot

Available

Available

Available

-

-

Reputation

N/A

N/A

Applicable

Applicable

Applicable

Customize

Not available

Available

Available

Available

Available

Off-chain Voting

Not available

Not available

Available

Available

Available

Sources: Messari, Hexlant Research


  1. DAO Ecosystem


The DAO ecosystem was divided into developer support funds, venture DAO, DeFi DAO, decentralized governance, protocol, DaaS. In recent years, the application fields have become more extensive, subdivided into social network types, metaverse, and asset management.


Fig. 6: DAOs Service Categories and Brief Introduction

Category

Project

Description

Platform

Approx. # of Members

Turnout

Developer

Badger DAO

-      A DeFi DAO that uses Bitcoin as collateral

-      Governance: Adjusted by $BADGER token, 10% of unpaid tokens participate in the vote and need to meet a quorum of 50% after 7 days.

-      $SETT: Aggregate DeFi returns on $BTC assets and automates profit optimization

-      Yearn vault system:

-      Digg: Token that rebases pegged to BTC every 24 hours.

-      A token that rebases Bitcoin’s current price every 24 hours.

Aragon

29,341

0

Gitcoin

-      Git+Bitcoin: Ecosystem of developers and contributors who cooperate as DAO to establish a distributed web.

-      Web3 & Gitcoin: 22.8 million dollars have been distributed since 2018 to support more than 1600 web3 projects.

Compound Governance

18,568

0.3

API3

-      Establishing a multi-chain compatible network managed by Aragon DAO to encourage API operators to provide their oracles.

-      Airnode: Middleware required for API providers to connect API to smart contract platforms that require data and services. API3 token: A basic token of API3 project. Granting the owner full governance authority over API3 DAO and acting as collateral in the data feed insurance pool

-      Airnode operators can stake $API tokens to API3 insurance contract and receive rewards.

Aragon

31

29.0

Labor Union

Raid Guild

-       A premier design and development agency.

-       Introduces themselves as “a decentralized collective of mercenaries ready to slay web3 product demons.”

-       A decentralized group that assists customers in assembling and improving web3 projects.

-       Non-proprietary network for web developers and designers.

Moloch

34

35.3

dOrg

-       A blockchain developer cooperative, full stack web3 developer group.

Gnosis Safe

/Snapshot

123

36.0

LexDAO

-       A non-profit association of legal engineering professionals

-       Code the existing legal settlement and provide coded contracts to the public.

-       Research, development, and dissemination of first-class legal methods and blockchain protocols that keep rules and promises with codes, not trust.

-       Implement a reputation system managed by a certified member identified as LexScribes.

Aragon

41

58.5

Art

PleasrDAO

-       Multi-signature decentralized autonomous organization

-       An assemblage of DeFi leaders, early NFT collectors, and digital artists who collect culturally important works in a charitable way.

Snapshot

69

79.7

Rarible

-       Designed to empower community members to shape, select, coordinate, and vote on new features of the platform.

-       Marketplace liquidity mining: 75,000 RARI are allocated equally to buyers and sellers weekly and can be obtained through participation in platform utilization such as purchasing and selling art.

Gnosis Safe

/Snapshot

27,782

7.7

SharkDAO

-       Build a community that collects Nouns and help coordinate and grow the NounsDAO ecosystem.

Gnosis Safe

-

-

FlamingoDAO

-       Making decisions to support NFT communities, including commissions, marketing, curating, and investments provided to artists, through voting.

-       Hold 40 members and 10 million dollars in the fund

-       Acquired approximately 6-700 NFTs.

-       Members are limited to 100 accredited investors defined by US law.

-

-

-

Aavegotchi

-       Aavegotchi DAO acquires 0.3% of all transactions from Ethereum’s Aavegotchi bonding curve and uses them as funds.

-       If a 20% quorum is achieved with a signal proposal that anyone can post, it will be introduced as a binding core proposal.

-       Core Proposal 1. Smol votes: Quorum of 5%. Intend for small decisions that do not affect the overall meta or value like marketing strategy and introduction of a cosmetic feature.

-       Core Proposal 2. Medium votes: Quorum of 10%. Intend for decisions that affect meta such as the introduction of new game items or XP allocation to some events.

-       Core Proposal 3. Galaxy votes: Quorum of 20%. Intend for major decisions that have a significant impact on the ecosystem such as a new Haunt, related factors affecting rarity scores. (Aavegotchi Improvement Proposals).

Aragon

/ Snapshot

22,471

21.9

Community

Zebpay - female-led DAO

-       The world's first women-only DAO.

-       New members are approved with the consent of a majority, and all votes must be approved with the consent of 60% or more.

-       Solar panel installment project is underway to help rural Indian women mine Bitcoin as a channel for financial independence and empowerment.

-

-

-

DisCO

-       Abbreviation for Distributed Cooperative Organizations.

-       Distributed cooperatives using open enterprise governance models.

-

-

-

Social

Media

KarmaDAO

-       Professional networking social community that exists as a chat group on social network Telegram.

-       Use tokens to allow access to the Telegram group.

-

-

-

FWB

(Friends with Benefits)

-       A private discord server.

-       Must own at least $75FWB tokens to become a part of FWB member.

Snapshot

3,305

24.9

Metaverse

Decentraland

-       A distributed virtual reality platform allows developers to build applications on top of it and generate profits.

-       Insists on a completely decentralized metaverse by discarding the smart contract private key for the first time.

-       LAND: Non-fungible digital assets maintained in an Ethereum smart contract. Use unique x, y coordinates. Records its coordinates, its owner, and a reference to a content description file and encodes the content the owner wishes to provide.

-       $MANA, Decentraland basic governance token, is used to vote for security committee members, development subsidies, land, and real estate policies, types of wearable items, and content adjustment.

Aragon

13,010

28.3

Asset

Management

Budget DAO

-       Provides visibility into token allocation, voting, finance, and other additional payments made by Aragon association.

-       Secures transparency in DAO’s use of funds and allows stakeholders to track their expenditures.

-       Moreover, Aragon provides additional details of fiat money expenditures that are not included in the Budget DAO through its semi-annual transparency report.

Aragon

5

100

PieDAO

-       A DAO that manages tokenized portfolio allocation to PieDAO, an asset management platform.

-       Provides cryptographic asset management in the form of an index tracker and PieVaults.

-       Governance similar to that individual ETF holders can vote for internal decisions.

-       All governance tokens of PieVaults are automatically delegated to PieDAO.

-       $DOUGH: Basic token of PieDAO. Must be owned to qualify as a member, and the holder of the $DOUGH has the authority to vote for governance decisions of the protocol.

Aragon

4,944

1.1

BitDAO

-       The world’s largest DAO based on asset management scale.

-       Developing BitDAO DeFi product and supporting partners and projects to allocate funds for ecosystem growth.

-       $BIT: Governance token of Compound Finance. This token allows. Chose ERC20 token due to a chance switching to on-chain governance in the future.

-       Raised $230 million from investors like Peter Thiel, Pantera Capital, Dragonfly Capital, etc.

Gnosis Safe

/Snapshot

12,023

0

Venture

Capital

AngelDAO

-       AngelDAO is a venture decentralized autonomous organization that supports various projects through financing, software development, network participation, and building community.

-       Focus on the investment venture, technology, and marketing support based on four founders’ finance.

-       Founders share equal voting rights.

Aragon/

Gnosis Safe

-

-

MetaCartel -

VentureDAO

-       MVC is a new affiliate of MetaCartel and aims to earn profits in the future by investing more in projects.

-       Unauthorized investors can also participate in DAO and hold stocks as long as they actively participate in the daily operation of the venture.

-       Delaware LLC managed by smart contract.

Moloch

110

67.3

DuckDAO

-       Distributed incubator services provide incubation, social media, strategic support, and OTC sales management service according to tier.

-       Club levels are classified According to the size of DuckDaoDime (DDIM) community access token holdings.

-       Staking and NFT ecosystems are established and used for investment.

-

-

-

The LAO

-       The LAO is a member-oriented venture capital fund organized in the United States to comply with US law and is affected by the LegalDAO and MolochDAO framework.

-       Delaware LLC managed by smart contract.

OpenLaw

98

42.9

Subsidy

Moloch

-       DAO established to support Ethereum 2.0 subsidies.

-       After the DAO hacking incident, the investment withdrawal function and user escape function were developed and supplemented.

-       Simple smart contract capabilities are used to reduce potential attacks.

-       Branched to develop numerous other DAOs, such as MVC or Marketing DAO.

-       Moloch Fork: Using a fork to create new DAOs. Through forks, the new community uses the same process to achieve common goals but with a different focus.

Moloch

108

55.6

Cura Dao

-       Community-led impact fund.

-       To become a member of Cura Dao, a majority of the members must agree on accepting a new member.

-       After writing the proposal, share it with CuraDAO to receive feedback. Then, propose an improvement proposal, which will be decided by voting in 4-5 days.

DAOstack

55

20.0

DeFi

Lending

Compound

-       Compound: A DeFi protocol that allows users to receive cryptocurrency deposits, loans, and interest.

-       $COMP holders have voting rights for the future of the protocol and will be activated after a two-day grace period once the proposal is passed.

-       Approximately 2,312 COMP are distributed every day. Half of it is obtained by the supplier, and the other half is obtained by the borrower.

Compound Governance

174,329

0.6

Aave

-       A distributed money market implements a liquidity pool system in which crypto loan assets are gathered in one place, and interest rates are determined algorithmically by the type of loaned assets.

-       Divided into 11 categories such as governance, new asset support, subsidies, risks, etc., to prepare and vote for proposals.

-

-

-

DeFi

Exchange

Uniswap

-       Decentralized cryptocurrency exchange with UNI, its governance token.

-       There is no risk of losing assets if the exchange is hacked since every individual control the private key.

-       Gov.uniswap: A governance discussion forum. New members need to read 15 posts corresponding to 4 topics in 10 minutes to register their posts.

-       Snapshot: Weighted according to the number of UNIs delegated to the voting interface that sends off-chain signals is applied.

-       Governance Portal: Voting can be delegated and transmitted on this portal, and the same functions can be performed in Coinbase custody, Uni governance, Boardroom.

Compound Governance

256,882

0.5

Sushiswap

-       A community-centered exchange that provides more incentives for the platform’s liquidity providers.

-       $SUSHI is a governance token on the surface, but it has been held only to those who staked $SUSHI in the $SUSHI/$ETH pool to vote for multiple signature members who have the right to change the code.

Gnosis Safe

/Snapshot

52,030

16.7

Curve

-       Curve: A distributed exchange using automated market makers provide swaps for token-based on stable coins.

-       Receive tokens as compensation for supplying liquidity to the pool.

-       At least 2500veCRV (a token received after staking 10,000CRV per year) is required to generate automated voting.

-

-

-

1inch

-       1inch: A distributed exchange aims for providing the best rates by discovering the most efficient exchange path in all major DEXs.

-       Set to launch DAO governance in 2022 and is focusing on forming a community base through a $1inch token.

-

-

-

DeFi

Derivative

Synthetix

-       Synthetix: DeFi protocol for synthetic cryptographic assets.

-       Synthetix grantsDAO: Comprises 5 members from approved community members and synthetix team members.

-       After forking a GitHub repository and submitting a grant proposal, DAO will review the proposal.

-       Proposals are submitted to the Grants page if it is necessary to be reviewed by DAO members.

-       Community members will have offline discussions on the feasibility of the proposal for two days.

-       After the grace period, the DAO votes on the position of 'agree/disagree/withdrawal,' and if four members agree, the proposal is approved.

-       At this time, grants are given as $SNX tokens.

-

-

-

Maker

-       A dynamic system of CDP (Collateralized Debt Position).

-       Works through a process called excessive collateral that binds assets provided by users as collateral to smart contracts in exchange for newly created DAI tokens.

-       Making decisions necessary for investment management and execution by voting.

-       Vote on matters necessary for the management and execution of investment using Ethereum.

-

-

-

Robo-

Advisor

Investment

yEarn DAO

-       A group of protocols running on the Ethereum blockchain that allows users to optimize profits on cryptographic assets.

-       Valuts: A collection of investment strategies designed to generate the best returns from other DeFi projects.

-       YIFI holders can vote to fund the DAO Vault ecosystem.

-       DAO governance determines weekly, monthly, and annual credit limits for accessing vaults.

Moloch

12

50.0

dHedge

-       A decentralized asset management platform that can create pools through smart contracts.

-       Anyone can set up their investment fund in the Ethereum blockchain or invest in funds managed by others in a non-custodial way.

-       Divided into two types of pools, public and private.

-       Anyone can invest in a strategy in a public pool, but a limited number of whitelist addresses can provide capital to the private pool.

Aragon

4,047

0

Insurance

Nexus Mutual

-       An insurance service that emerged to reduce damage caused in the process of using DeFi of decentralized services.

-       Nexus Mutual, which creates insurance products with community-based management and financials, compensates for losses by using member funds stored in the risk-sharing pool when the loss of funds due to smart contract errors or hacking of DeFi services happens.

-

-

-

UnoRe

-       The world’s first risk trading reinsurance platform.

-       DAO has transferred part of its risk portfolio to the community to reduce the likelihood that insurers will have to pay large obligations due to claims.

-       Communities can invest and trade in portfolio risk and earn significant returns on investments.

Aragon

-

-

Corporation / Project

Fund Raising

VitaDAO

-       DAO funding longevity research in the pharmaceutical industry.

-       The goal is to extend human life by researching, financing, and commercializing longevity treatments centered on intellectual property assets and patents.

-

-

-

Human Capital Contract

Case

-       Attempts to tokenize human capital.

-       Financial means such as stocks used to finance higher education, students sell a certain percentage of future income in return for capital investment, and the interest rate varies depending on the student’s income.

-       Ben Gravis created his ECR-20 Ben Gravis token using the ZapProtocol curation market.

-

-

-

Calaxy

-       Open social marketplace for creators.

-       A decentralized creator economy that cultivates community, grants power, and provides incentives through customized creator tokens.

-

-

-

Freeholder, Joint Tenant, Nomad Community

Permatek

-       Digital nomad community.

-       Through seasonal management, members pass the membership token to the next guests.

-

-

-

Dtravel

-       A distributed platform for a home-sharing economy that facilitates a distributed network, accommodation search, reservation, and payment.

-       Fully managed by DtravelDAO and all owners of $TRVL token can actively participate in organizational governance by submitting and voting proposals that are submitted by the representative committee.

-

-

-

Media

Mirror

-       Obtain community membership with a $WRITE token.

-       The winner of the Token race secure publications of the media DAO on Mirror.

-       Generate profits by launching crowdfunds, creating and selling NFTs, and auctioning NFTs.

-

-

-

Politics

EstoniaDAO

-       A decentralized organization that connects more than 60,000 Estonian e-residents to the authentication system.

-       e-Residency: Foreigners can live virtually without living in Estonia.

-       People who have e-Residency of Estonia can do everything online, including creating a company that is legally compliant within in EU, using banking services, paying taxes, and signing documents safely.

Aragon

5

20.0

Aragon Voice

-       The first Aragon OpenStack instance, a gas-free, universally verifiable new voting solution.

-       Proposals are processed in a two-layer protocol and voting metadata is stored in IPFS.

-       As it is used as a signaling platform, it is possible to conduct a quick survey on the public sentiment of the community, and the results can be used to select policies.

Aragon

-

-

Sources: Hexlant Research, Aragon, DeepDAO (21.9.30),


III. Policy Approach


“DAO” is the term for an organization operated by recorded rules in smart contracts. Its meaning has been established in the blockchain space, yet it is necessary to examine to what extent DAOs will be recognized.

1) D- Decentralized

This question is whether decentralization should be established only at the infrastructure layer, which is a blockchain-based network, or whether decentralization should be implemented in governance that should not be controlled by certain participants or groups.

2) A – Autonomous

The required level of autonomy and automation varies depending on the degree of human intervention, whether there should be none or the DAO is operated with the participation of members but should not depend on a small number.

* Wyoming DAO law defines a DAO as a member-managed or algorithmically managed organization. According to the amendment, a DAO should specify the scope of management to which the algorithm is applied and how it is managed by members in the Article of Association. The algorithmically managed DAO should allow smart contracts to modify and upgrade updates.

3) O – Organization

There is the question of when a community that interacts with smart contracts is considered an effective organization. For example, whether a simple act of trading based on a smart contract corresponds to organizational activity or active participation, such as a governance model or collective interaction between participants, defines the DAO. In the former case, there is no subject to regulate. However, in the latter case, the matter of the corporate status of the DAO and the separate recognition of a corporation that operates the DAO and the DAO itself become crucial factors in determining whether people who participate in DAO activities can be protected from liability.


Legal Status

Various attempts are being taken to ensure the legal status of the DAO to reduce the risk of ambiguity in its legal status. DAOs expose members to liability for all actions and obligations of a DAO when it is considered as a general partnership. Therefore, a bill was passed to provide liability protection for members such as contract developers who did not participate in the DAO and its operations but only wrote code.


Compound overpaid $900 million due to an update error

Due to an error in the update of the Compound payment contract on September 29, 2021, Compound erroneously paid users an additional 89 million dollars in Compound tokens ($28 million $COMP). There were also ethical disputes about whether users who accidently received this jackpot were obligated to return $COMP, and whether Compound Labs was eligible to take legal action to collect $COMP.


In April 2021, the State of Wyoming in the United States passed a DAO bill that allows DAOs to be granted legal status based on smart contracts. In the same month, SEC member Hester Peirce announced a token safe harbor proposal 2.0, providing a three-year grace period before deciding whether to provide securities to the token project.


State of Wyoming’s DAO Law

While banning lawsuits that treat DAO as general partnerships, state courts enforce a DAO’s rights as a corporation, so DAO developers are not subject to legal responsibility by the simple establishment of a DAO.

Securities Law Applied to DAO Tokens

In 2017, the US Securities and Exchange Commission issued an authoritative explanation in an investigation report that DAO tokens correspond to securities under the Securities Act of 1993 and the Securities Exchange Act of 1934. Even though the token issuance is based on distributed ledger or blockchain technology, the current law should be applied because of the nature of the DAO and ICO issuance methods.


In July 2021, a bill was imposed in Wyoming to officially allow decentralized autonomous organizations that have not been defined by existing laws. Now, DAOs can register as a corporation, and a limited liability company can convert to a DAO. DAO is denominated as DAO, LAO, DAO LLC, etc. The DAO follows LLC legal precedents in governance, tax, and dispute resolution.


American CryptoFed DAO, the first Wyoming DAO corporation

American CryptoFed DAO, which uses the EOS blockchain platform, is the first decentralized autonomous organization in Wyoming. It utilizes an unlimited issuance algorithm coin “Ducat” and governance token “Locke” with 10 trillion coins in circulation.


However, it is unclear whether the DAO recognized in Wyoming will be able to maintain the same legal status in U.S. federal courts. In addition, it is unknown whether an organization managed by a DAO will rely on this law. Still, we can discuss a more in-depth regulatory framework based on the DAO law. Considering the wide range of governance implemented by DAOs, we hope that there will be precedents to solving the DAO’s unique problems beyond the application of existing regulations, thereby expanding regulatory awareness of blockchain.


Fig. 7: Comparison of the Legal Status of Limited Liability Companies in Wyoming and Delaware


Wyoming LLC

Wyoming DAO LLC

Delaware LLC

Corporation types

Individual proprietorship

DAO

Corporation

State corporate income tax

N/A

N/A

Applicable

State personal income tax

N/A

Applicable

Applicable

Tax on corporate share

N/A

N/A

N/A

Franchise tax

Applicable

Applicable

Applicable

Minimal initial filing fee

Applicable

Applicable

N/A

Minimal annual fees

Applicable

Applicable

N/A

Annual report required

N/A

N/A

Only for the first one year

Nominee shareholders allowed

Applicable

Applicable

N/A

Share certificates required

N/A

N/A

Applicable

Directors, Officers, Employees, and Agents statutorily indemnified

Applicable

Applicable

N/A

Corporate income tax information share with the IRS

N/A

N/A

Applicable

Sources: Messari, Hexlant Research


Risk Management

Through the DAO’s mechanism, common economic goals are shared, but also shared are risks and rewards with unknown people. Hence, arbitrator groups are established to settle disputes and threats. Such group have neither control nor decision-making power. The members can be elected by other community members, and re-election or exclusion can be determined also by community support after certain activities. In some projects, developers may join the group in the early stages.

They conduct risk assessments and present amendments on market indicators such as smart contract security (code audit), Oracle compatibility, market liquidity, asset governance, and legal issues on behalf of the community for submitted protocol proposals. Arbitrator groups consist of technology experts (smart contract, Oracle, security), economy (market risk, token design, insurance, financial reporting), laws & regulations (security law, property law, hard assets). Communities can achieve common goals more safely with them.


Voting Rights

Anyone in the world can access and act as a member of DAOs, and members exercise their voting rights for risks and rewards. Various voting methods have been attempted, possibly based on the reputation or the number of governance tokens obtained through an activity, such as weighted voting and square voting. Wyoming DAO law includes basic rules for voting rights. The revised bill indicates that each member is entitled to one vote in a DAO that does not require contribution of digital assets as a prerequisite to be a member. Thus, members will have equal voting rights for basic proposals of DAOs, such as the dissolution of a DAO.


IV. Conclusion

The DAO is a new organizational form that manages and navigates activities through a smart contract. Anyone can participate in a DAO where it discloses the activity data transparently to the public, which indicates the fairness of results. The result of voting is trackable since a smart contract necessitates that the agreement is implemented in each DAO. In addition, the whitelist allows identification of the members and counterparties of the transaction. Such interactions between DAOs, verification, and expansion to external data, are all mechanisms that embody trust in the digital age.

Through these mechanisms, future DAOs will possess the power of predictability and sustainability. DAOs can transparently confirm that the activities of community members are reasonable decisions and move forward according to the common interests and intended direction. To fully operate the system, risk management must be supported in order to protect all participants. This includes security technology, finance reporting to expand economic and regulatory awareness, and the application of legal and institutional devices. Furthermore, for the maturation of DAOs, incentive measures to address low turnout and limited usage of governance tokens should be improved.


References

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